A stochastic flows approach for asset allocation with hidden economic environment

Tak Kuen Siu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)
15 Downloads (Pure)

Abstract

An optimal asset allocation problem for a quite general class of utility functions is discussed in a simple two-state Markovian regime-switching model, where the appreciation rate of a risky share changes over time according to the state of a hidden economy. As usual, standard filtering theory is used to transform a financial model with hidden information into one with complete information, where a martingale approach is applied to discuss the optimal asset allocation problem. Using a martingale representation coupled with stochastic flows of diffeomorphisms for the filtering equation, the integrand in the martingale representation is identified which gives rise to an optimal portfolio strategy under some differentiability conditions.

Original languageEnglish
Article number462524
Pages (from-to)1-11
Number of pages11
JournalInternational Journal of Stochastic Analysis
Volume2015
DOIs
Publication statusPublished - 2015

Bibliographical note

Copyright the Author 2015. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

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